january 2015 dr reddy’s labs - business...

29 January 2015

3QFY15 Results Update | Sector: Healthcare

Dr Reddy’s Labs

Arvind Bothra ([email protected]); +91 22 3982 5584

Amey Chalke ([email protected]); +91 22 3982 5423

BSE SENSEX S&P CNX CMP: INR3,359 TP: INR3,870 (+15%) Buy 29,682 8,952

Bloomberg DRRD IN

Equity Shares (m) 170.3 M.Cap. (INR b) / (USD b)

572.1/9.3

52-Week Range (INR) 3,662/2,250

1, 6, 12 Rel.Per (%) -1/7/-17 Avg Val(INR M)/Vol ‘000

1,165/414

Free float (%) 74.5

Financials & Valuation (INR Billion)

Y/E MAR 2015E 2016E 2017E

Sales 147.0 161.2 183.4 EBITDA 33.5 38.3 45.4 Net Profit 22.1 25.0 29.9 Adj. EPS

130.0 146.7 175.8

EPS Gr. (%) 4.5 12.8 19.8 BV/Sh. (INR) 642.8 766.7 916.7 RoE (%) 20.2 19.1 19.2 RoCE (%) 16.8 17.9 18.6 Payout (%) 17.6 17.6 17.6 Valuation P/E (x) 25.8 22.9 19.1 P/BV (x) 5.2 4.4 3.7 EV/EBITDA

17.2 14.8 12.2

Div. Yield (%) 0.6 0.7 0.8

Estimate change

TP change

Rating change

Operationally strong quarter; Growth trajectory to improve Dr Reddy’s (DRRD) 3QFY15 results surprised positively (10% beat at PAT level), thanks to stronger revenue growth. Revenue grew 9% YoY to INR38.4b (3% above), resulting in similar beat at EBITDA level (INR8.9b, down 13% YoY). PAT at INR 5.7b (down 7% YoY) benefitted from higher other income, including fx gain of INR 696m, partially offset by exceptional impairment of INR 534m and higher tax rates (31% vs 21% est). US, Russia and PSAI business drove topline surprise: Higher traction in niche launches like gRapamune, gValcyte drove stronger US sales (44% of sales, up 18% QoQ) while India growth at 11% was largely in line. Russia/CIS registered strong underlying growth (27% in constant currency) largely offsetting impact of 30% YoY Ruble depreciation. PSAI sales surprised positively (up 20% YoY), while surge in Venezuela (up 185%) boosted RoW business (up 82%, 10% of sales). Controlled S,G&A offset impact of EM currency headwind: 3Q EBITDA margins at 23.2% was in line with expectations despite sharp increase in R&D spend (11.2% of sales, up 45% YoY), thanks to contained S,G&A spend (23.7% of sales). We expect margin trajectory to improve (forecast 200bp expansion over FY15-17E) led by niche US launches (complex injectibles) & operating leverage. Earnings call takeaways: (1) Full impact of Russian Ruble depreciation to reflect in coming quarters, as cash flow hedges expire (2) Key US launches like gNexium, gDiovan delayed due to Form 483 issued at Srikakulam API facility. Site transfer for gNexium underway, launch likely in few months. (3) Company to respond to first set of FDA queries on Copaxone ANDA filing in 2-3 months implying potential delay in product launch timeline (2HFY16 assumed). Valuation and view: Recent underperformance of DRRD factors risk from Russian currency depreciation and overhang of Srikakulam facility regulatory issues. However, sharp valuation discount to large peers (15%) would narrow on improving growth visibility (niche US pipeline) & earlier resolution of FDA issues. Retain Buy with target price of INR 3,870 (22x FY17E, 10% discount to large peers target multiple).

Investors are advised to refer through disclosures made at the end of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

http://www.motilaloswal.com/Institutional-Equities�

29 January 2015 2

Dr Reddy’ s Labs

3Q Result analysis

Exhibit 1: Quarterly Snapshot (Revenue mix) (INR m) 3Q FY14 2Q FY15 3Q FY15 YoY QoQ Comments

Global Generics 29,396 28,869 31,692 8 10 Share of Global generics in total revenues rising

North America 16,223 14,293 16,819 4 18 US growth surprised positively, led by recent niche launches Europe 1,862 1,434 1,947 5 36 EU business growth remains muted

India 3,913 4,799 4,328 11 -10 Deferment of select product supplies affected 3Q growth

Russia/CIS 5,296 4,798 4,766 -10 -1 Strong underlying growth (27% constant currency) offset impact of

currency depreciation

RoW 2,102 3,545 3,832 82 8 Growth led by Venezuela (up 185% YoY)

PSAI 5,062 6,392 6,112 21 -4 PSAI growth surprised positively North America 780 1,298 1,360 74 5

Europe 1,949 1,493 2,055 5 38

India 945 2,020 948 0 -53

Others 1,388 1,581 1,749 26 11

Proprietary products 880 618 626 -29 1

Total revenues 35,338 35,879 38,430 9 7 Overall revenues wree 3% ahead of expectations

Source: Company, MOSL

Exhibit 2: Quarterly Profit and Loss statement (INR m) 3Q FY14 2Q FY15 3Q FY15 YoY QoQ Comments

Total revenues 35,338 35,879 38,430 8.7 7.1

Cost of revenues 13,947 14,893 16,079 15.3 8.0

Gross profit 21,391 20,986 22,352 4.5 6.5

Gross margin (%) 61 58 58 (237)bp (33)bp Weaker business mix (higher PSAI sales) affected gross margins

SG&A expenses 8,153 8,716 9,109 11.7 4.5 Controlled overheads aided profitability % of Total Revenues 23 24 24 63 bp (59)bp

R&D Expenditure 2,979 4,113 4,316 44.9 4.9 R&D intensity likely to remain high

% of Total Revenues 8 11 11 280 bp (23)bp

EBITDA 10,259 8,157 8,927 (13.0) 9.4 EBITDA beat was largely led by topline

EBITDA margin (%) 29 23 23 (580)bp 49bp Margins were in line with expectations

Amortization expenses 1,793 1,957 2,041 13.8 4.3 In line with recent quarterly trends

% of Total Revenues 5 5 5 24 bp (14)bp

Other operating income (177) (265) (341) 92.7 28.7

Operating profit 8,643 6,465 7,227 (16.4) 11.8

OPM (%) 24 18 19 (565)bp 79bp

Forex loss/(gain) (92) 243 (696) 656.5 (386.4) Includes MTM gain on hedges

Finance expenses 77 (664) (317) (511.6) (52.3)

Equity in loss of affiliates (46) (51) (47) 1.3 (8.6)

PBT 8,704 6,937 8,286 (4.8) 19.4

Income tax 2,521 1,196 2,541 0.8 112.4

Effective tax rate (%) 29 17 31 170 bp

1,342bp Higher than expected tax rates restricted net profit

Net income - reported 6,183 5,741 5,745 (7.1) 0.1 Net profits came in 10% ahead of estimates thanks to higher other

income

Adjusted Net Profit 5,686 5,741 6,279 10.4 9.4 One-time impairment charge

29 January 2015 3

Dr Reddy’ s Labs

Earnings call takeaways US: On constant currency basis, DRRD registered 17% QoQ growth in US at USD

274m, led by new product launches, sustained market share in old products and forward buying for holiday season. Two ANDAs were filed during the quarter and six products were commercialised (including Habitrol OTC brand) in 3Q. Cumulative pending ANDA filing stands at 68 including 43 Para IVs of which 13 are FTFs. DRRD has maintained its market share in key drugs like gVidaza (53%), gDepakote ER (21%), gReclast (61%) and gImitrex autoinjector (22%) while market share in gDacogen declined to 80% on new competition. Low competition launches like gRapamune, gValcyte boosted growth in US business during the quarter.

Russia: Despite sharp depreciation in Ruble, Russia sales registered strong underlying growth at 27% YoY (constant currency), on account of higher volume growth and price hike undertaken in non price controlled drugs (50% of portfolio). Management is confident of continuing this growth movement in the region. However, currency headwinds (30% YoY RUB dep.) in the region led to 8% YoY fall in rupee terms. Impact of Ruble depreciation during the quarter was quantified at ~INR 1b, partly offset by Ruble hedges

India: Domestic branded business registered 11% growth at INR4.3b, led by newly launched products. Deferment of order to 4Q impacted growth somewhat, adjusting for which the company outpaced industry growth. The company had launched 4 new products- namely, Telsartan-CT80, Venusia, Acrofy and Reclimet-XR.

Other markets: DRRD continue to report sluggish growth in Europe (4% YoY) for seventh consecutive quarter. However, other markets which include emerging geographies grew 82% to INR3.8b with higher sales from Venezuela. Venezuela sales grew 185%YoY, driven by strong volume growth in the region. However, management expressed concerns over currency volatility in the country and has USD15-20m cash exposure to this country, which is yet to be repatriated.

PSAI: PSAI segment sustained growth momentum, expanding by 21%YoY at INR 6.1b, led by 74% YoY growth in North America region. Management however highlighted that PSAI business would rather focus on profitability and is unlikely to register strong growth in the coming quarters.

R&D intensity remains high: DRRD continues to invest aggressively in building its differentiated pipeline for regulated markets and hence has continued to be the highest spender among peers in R&D (11.2% of sales). Management expects to file two novel molecules (IND) in FY15 itself, and is likely to hold a dedicated R&D day to outline its key R&D initiatives (date not decided yet).

Gross margins for global generics and PSAI segment stood at 65.9% and 17.2%, respectively. PSAI gross margins were much lower sequentially at 17.2% against 26.8% seen in 2QFY15, primarily on account of adverse product mix.

Net working capital increased by USD65m in 3Q, owing to anticipated launches in US and higher receivable days.

Balance sheet hedges stand at USD411m, while outstanding cash flow hedges are at USD591m (at average rate of INR59-62/USD). Russian exposure could see partial benefit from Ruble hedges worth RUB 945m (for FY15).

Tax rate is expected to be in the range of 21-22%.

29 January 2015 4

Dr Reddy’ s Labs

Operating metrics

Exhibit 3: Key operating metrics

4QFY12 1QFY13 2QFY13 3QFY13 4QFY13 1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

Revenue Mix (%) US 32.8 31.2 32.2 32.3 34.2 38.2 39.4 45.9 43.0 46.8 39.8 43.8

India 12.0 13.7 13.5 13.0 10.4 12.3 12.5 11.1 11.8 11.4 13.4 11.3

Europe 6.8 8.6 6.2 6.7 5.5 5.5 5.2 5.3 5.1 4.1 4.0 5.1

Russia 13.3 16.4 13.3 15.3 13.5 15.8 16.4 15.0 13.0 13.8 13.4 12.4

Others 4.2 5.2 4.6 5.4 4.0 5.2 5.4 5.9 5.6 6.3 9.9 10.0

PSAI 28.2 21.8 27.3 24.9 30.5 20.6 19.1 14.3 19.1 15.7 17.8 15.9

Innovative

products 2.6 3.2 2.9 2.4 2.0 2.4 1.9 2.5 2.4 1.8 1.7 1.6

Revenue Gr. (%) 31.8 28.4 27.0 3.5 25.6 12.0 16.5 23.3 4.2 23.6 6.9 8.7

US 47.5 37.6 47.4 (16.8) 30.7 37.3 42.9 75.5 31.1 51.5 7.9 3.7

India 16.7 18.6 12.1 11.6 8.7 0.3 8.5 5.2 17.8 14.5 14.1 10.6

Europe (10.3) 13.6 (16.1) (20.4) 1.7 (27.8) (0.9) (3.6) (3.1) (7.2) (18.6) 4.6

Russia 32.3 38.1 13.6 32.0 27.5 7.7 43.6 20.9 (0.0) 8.3 (13.0) (10.0)

Others 36.6 65.5 49.6 41.8 18.4 12.0 36.2 35.1 48.3 50.0 94.8 82.3

PSAI 34.8 14.4 32.7 28.1 35.9 6.2 (18.7) (29.0) (34.7) (5.6) (0.2) 20.7

Innovative

products 55.0 54.0 36.1 (17.3) (5.7) (16.5) (24.8) 26.4 28.5 (6.6) (1.0) 5.0

As % of sales Raw material 43.6 43.2 43.6 44.6 46.4 43.3 42.0 39.5 42.8 40.7 41.5 41.8

SG&A 25.7 31.0 26.3 28.5 24.8 29.2 23.8 23.1 24.0 25.0 24.3 23.7

R&D cost 6.5 6.2 6.1 7.1 7.3 8.5 9.0 8.4 11.4 11.0 11.5 11.2

Tax Rate 19.6 9.8 27.8 18.5 27.3 12.8 10.3 29.0 20.6 21.5 17.2 30.7

Margins (%) Gross Margins 56.4 56.8 56.4 55.4 53.6 56.7 58.0 60.5 57.2 59.3 58.5 58.2

EBITDA Margins 24.1 19.7 24.0 19.8 21.5 19.0 25.2 29.0 21.8 23.2 22.7 23.2

EBIT Margins 14.9 14.6 16.8 15.0 17.0 13.3 20.0 24.0 16.2 17.9 17.3 17.9

PAT margins 7.7 9.8 11.6 10.8 13.7 12.7 20.6 16.1 13.8 15.6 16.0 16.3

Source: Company; MOSL

29 January 2015 5

Dr Reddy’ s Labs

Valuation and view Successful monetization of several niche products (gDacogen,gVidaza) has helped DRRD achieve a formidable base for FY14. With fewer new launches in US and concerns on Russian market (Ruble depreciated 37% in last three months), FY15E would be a year of consolidation for DRRD. However, we expect upside from US portfolio and healthy domestic growth to result in 16% EPS CAGR over FY15-17E to be driven by 12% revenue growth and cumulative 200bp operating margin expansion. Our TP of INR 3,870 implies 15% upside from current levels. We value DRRD at 22x FY17E EPS, at par with sector average (one-year forward P/E) and at discount to large peers due to: Relatively slower earnings growth of 16% CAGR (vs 23% for large peers) Potential overhang of currency depreciation/demand outlook in key emerging

markets (21% of sales) Healthy Balance Sheet (D/E: 0.4x) and return ratios (RoE at 20%) Key catalysts to drive stock’s performance over the medium term are: Stabilisation of emerging market economies/currency, mainly Russia/CIS (12% of

sales) Clearance of Form 483 issues at Srikakulam API facility Launch of key products like gCopaxone, gNexium, etc Key risks to our investment thesis Regulatory delays affecting key US launches, Adverse outcome of pending FDA issues (API facility) Further depreciation of Russian currency. Every 10% depreciation of Ruble

hereon (v/s USD) leads to 2% downgrade in EPS estimate (annualized).

Exhibit 4: DRRD trades at par to 10 year avg. PE


Exhibit 5: DRRD trades at 38% premium to sensex PE


21.4

48.2

21.0

11.2

0

10

20

30

40

50

60

Jan-

05

Apr-

06

Jul-0

7

Oct

-08

Jan-

10

Apr-

11

Jul-1

2

Oct

-13

Jan-

15

PE (x) Peak(x) Avg(x) Min(x)

Negative Earnings Cycle

35.7 37.9

-100

0

100

200

300

Jan-

05

Apr-

06

Jul-0

7

Oct

-08

Jan-

10

Apr-

11

Jul-1

2

Oct

-13

Jan-

15

Dr Reddy’ s Labs PE Relative to Sensex PE (%) LPA (%)

Negative Earnings

Cycle

29 January 2015 6

Dr Reddy’ s Labs

Story in charts

Exhibit 6: Formulation led sales growth (INR b)


Exhibit 7: India formulation business


Exhibit 8: US Sales to grow at 16% CAGR over FY15-17E


Exhibit 9: PSAI business to see moderate growth ahead


Exhibit 10: EBITDA margins improving with product mix


Exhibit 11: EBITDA growth to be moderated


50 49 53 70 83 105 119 129 148

FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Formulations (INR b) API (INR b)

10,158 11,690 12,931 14,560 15,714 17,801 20,293 23,134

19.8

15.1

10.6 12.6

7.9

13.3 14.0 14.0

FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

DF Revenue (INR m) YoY Growth (%)

14,1

06

15,0

38

26,6

14

35,1

34

54,7

43 64

,094

74,7

84

84,8

80

11 7

77

32

56

17

17 14


Core US sales (INR m) YoY Growth (%)

20,404 19,647 23,813 30,702

23,974

24,436 27,069 29,480

9

-4

21 29

-22

2 11 9

FY10 FY11 FY12 FY13 FY14E FY15E FY16E FY17E

PSAI Sales (INR M) YoY Growth (%)

55.7 55.5 57.9 58.9 55.4 58.2 59.2 62.5 63.0

21.8 20.2 21.0 24.5 21.3 24.0 22.8 23.8 24.8


Gross Margin (%) EBITDA Margin (%)

15 14 16 24 25 31 33 38 45

127

-610

52

426

6 14 19


EBITDA (INR b) Growth (%)

29 January 2015 7

Dr Reddy’ s Labs

Exhibit 12: Strong earnings growth expected ahead


Exhibit 13: Rich ANDA pipeline


Exhibit 14: R&D expense higher due to NCE research


Exhibit 15: OTC share growing in Russia sales


Exhibit 16: Return ratios lower with lower margins


Exhibit 17: Fixed asset turnover decreasing


23

-31

6 66 73 81 124 130 147 176

15 18

2

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E

Core EPS (INR/ share)

138 158 170

187 193 209 222

68 73 75 80 65 62 68

FY09 FY10 FY11 FY12 FY13 FY14 YTD

ANDA filed ANDA pending

3,793 5,060 5,911 7,781 12,403 16,433 17,325 19,718

5.4 6.8 6.1 6.7

9.4

11.2 10.8 10.8


R&D (INR m) As a % of sales

125 145 165 170 165

2751

67 88 105

18 26 29 34

39

FY10 FY11 FY12 FY13 FY14

Rx (USD m) OTC (USD m) OTC ( % of sales )

-12.3

2.5

24.1 21.6 18.7 23.3

20.2 19.1 19.2

-2.4

3.1

16.8 19.7 17.2 18.1 16.8 17.9 18.6


RoE (%) RoCE (%)

26 30 38 44 53 63 74 85 96

2.6

2.4

1.9

2.2 2.2 2.1

2.0 1.9 1.9


Gross block (INR b) Fixed Asset turnover

29 January 2015 8

Dr Reddy’ s Labs

Corporate profile: Dr. Reddy's Laboratories

Exhibit 19: Shareholding pattern (%) Dec-14 Sep-14 Dec-13

Promoter 25.5 25.5 25.5

DII 5.7 5.4 7.6

FII 55.9 55.5 50.5

Others 12.9 13.7 16.5

Note: FII Includes depository receipts

Exhibit 20: Top holders Holder Name % Holding

First State Investment Management (UK) Ltd.First

8.5

Oppenheimer Developing Markets Fund 3.5 Blackrock Institutional Trust Company & their

2.7

Abu Dhabi Investment Authority 2.1

Life Insurance Corporation of India & Associates 2.0

Exhibit 21: Top management Name Designation

Satish Reddy Chairman

G V Prasad Vice Chairman & MD & CEO

Exhibit 22: Directors Name Name

Satish Reddy Sridar Iyengar*

G V Prasad Bruce L A Carter*

J P Moreau* Kalpana Morparia*

Anupam Puri* Ravi Bhoothalingam*

Omkar Goswami* Ashok Sekhar Ganguly*

*Independent

Exhibit 23: Auditors

Name Type

BSR & Co LLP Statutory Sagar & Associates Cost Auditor

Exhibit 24: MOSL forecast v/s consensus

EPS (INR) MOSL

forecast Consensus

forecast Variation (%)

FY15 130.0 133.2 -2.4 FY16 146.7 156.6 -6.3 FY17 175.8 181.5 -3.2

Company description Dr. Reddy's is a vertically integrated company, with presence across the pharmaceutical value chain through its core businesses of Global Generics, Pharmaceutical Services and Active Ingredients (PSAI) and Proprietary Products. Company is currently developing bio-generics and NCEs. Key focus markets include India, the US, Europe and Russia.

Exhibit 18: Sensex rebased

29 January 2015 9

Dr Reddy’ s Labs

Financials and valuations

Key assumption Segment growth 2010 2011 2012 2013 2014 2015E 2016E 2017E

USA (18.0) 17.5 58.1 2.6 34.8 15.1 15.0 13.5

India 16.0 19.7 5.6 (0.7) (3.3) 12.2 12.4 14.0

Europe (21.5) (9.1) (6.6) (17.4) (19.2) (9.4) 0 0

Russia 15.8 23.8 16.4 12.6 5.0 (1.5) (25.3) 19.0

Others 41.7 22.0 10.0 25.8 18.9 66.3 15.0 25.0

PSAI 5.3 0.1 15.2 14.2 (29.9) 0.7 9.2 8.9

Innovative products 37.3 39.9 50.6 (1.7) (9.4) (9.7) 13.5 15.0

Total Sales (2.0) 10.5 22.9 5.5 2.8 10.6 7.7 13.8

Expenses

Cost of sales (%) 44.5 42.1 41.1 44.6 41.8 40.8 37.5 37.0

EBITDA Margin (%) 20.2 21.0 24.5 21.3 24.0 22.8 23.8 24.8

Income Statement (INR Million) Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E Net Sales 70,277 74,693 96,738 116,266 132,171 147,024 161,159 183,422 Change (%) 1.2 6.3 29.5 20.2 13.7 11.2 9.6 13.8 Other Income 1,058 1,118 1,669 3,634 953 2,409 1,880 2,110 Total Expenditure 56,075 59,033 72,996 91,503 100,472 113,520 122,884 138,025

EBITDA 14,202 15,660 23,742 24,763 31,699 33,505 38,275 45,397 Change (%) -6.0 10.3 51.6 4.3 28.0 5.7 14.2 18.6 Margin (%) 20.2 21.0 24.5 21.3 24.0 22.8 23.8 24.8 Depreciation & Amort. 12,763 4,147 6,254 6,237 7,085 8,020 8,541 9,721 EBIT 1,439 11,513 17,488 18,526 24,614 25,485 29,734 35,676 Net Interest Exp 372 189

118 -636 -750 413 413

Forex (Gains)/Losses 72 0 0 365 -400 0 0 0 PBT after EO Expense 2,053 12,442 19,157 21,677 26,602 28,643 31,200 37,372 Tax 985 1,403 4,204 4,900 5,093 6,524 6,240 7,474 Tax Rate (%) 48.0 11.3 21.9 22.6 19.1 22.8 20.0 20.0 Minority Interest 0 0 0 0 0 0 0 0 Reported PAT 1,068 11,039 14,953 16,777 21,510 22,119 24,960 29,898 Adjusted Net Profit 1,068 11,099 12,428 13,682 21,174 22,119 24,960 29,898 Change (%) -120.7 939.2 12.0 10.1 54.8 4.5 12.8 19.8 Margin (%) 1.5 14.9 12.8 11.8 16.0 15.0 15.5 16.3

29 January 2015 10

Dr Reddy’ s Labs


Balance Sheet (INR Million) Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E Equity Share Capital 840 846 848 849 851 851 851 851 Reserves 42,075 45,144 56,596 72,256 89,950 108,488 129,566 155,083 Net Worth 42,915 45,990 57,444 73,105 90,801 109,338 130,417 155,934 Loans 14,656 23,503 32,210 36,678 44,742 41,347 41,347 41,347 Deferred Liabilities/Tax 1,438 87 -833 -1,669 -3,310 -3,310 -3,310 -3,310 Capital Employed 59,009 69,580 88,821 108,114 132,233 147,375 168,454 193,971 Gross Block 29,679 38,359 44,064 52,958 63,444 73,782 85,119 96,457 Less: Accum. Deprn. 12,087 14,714 18,086 21,213 25,695 30,504 35,965 42,014 Net Fixed Assets 22,459 29,642 33,246 37,814 44,424 49,953 55,829 61,117 Investments 4,153 622 11,558 18,131 26,384 20,330 20,330 20,330 Goodwill/Intangibles 13,973 15,246 13,529 14,021 14,697 12,266 12,266 12,266 Curr. Assets 38,463 47,560 59,179 68,751 78,664 94,261 109,916 133,927 Inventory 13,371 16,059 19,352 21,600 23,992 27,874 28,102 31,558 Account Receivables 11,960 17,615 25,339 31,972 33,037 36,209 39,690 45,173 Cash and Bank Balance 6,584 5,729 7,379 5,136 8,451 15,476 26,008 38,854 Others 6,548 8,157 7,109 10,043 13,184 14,702 16,116 18,342 Curr. Liability & Prov. 20,039 23,490 28,691 30,603 31,936 29,434 29,887 33,669 Account Payables 9,322 8,480 9,502 11,862 10,503 11,453 11,547 12,967 Other Current Liabilities 10,717 15,010 19,189 18,741 21,433 17,981 18,339 20,702 Net Current Assets 18,424 24,070 30,488 38,148 46,728 64,827 80,029 100,258 Appl. of Funds 59,009 69,580 88,821 108,114 132,233 147,376 168,454 193,971

Ratios 0.56509 0.5321 Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E Basic (INR)

EPS 6.4 65.6 73.3 80.6 124.5 130.0 146.7 175.8 Cash EPS 82.4 90.1 110.2 117.3 166.1 177.2 197.0 232.9 BV/Share 255.6 271.8 338.7 430.5 533.8 642.8 766.7 916.7 DPS 11.3 11.2 13.7 13.8 18.0 19.5 22.0 26.4 Payout (%) 207.4 20.2 18.2 16.3 16.7 17.6 17.6 17.6

Valuation (x)

P/E 45.8 41.7 27.0 25.8 22.9 19.1 Cash P/E 30.5 28.6 20.2 19.0 17.1 14.4 P/BV 9.9 7.8 6.3 5.2 4.4 3.7 EV/Sales 6.0 5.0 4.4 3.9 3.5 3.0 EV/EBITDA 24.6 23.6 18.3 17.2 14.8 12.2 Dividend Yield (%) 0.4 0.4 0.5 0.6 0.7 0.8

Return Ratios (%)

RoE 2.5 24.1 21.6 18.7 23.3 20.2 19.1 19.2 RoCE 3.1 16.8 19.7 17.2 18.1 16.8 17.9 18.6

Working Capital Ratios

Fixed Asset Turnover (x) 2.5 2.2 2.3 2.4 2.3 2.1 2.0 2.0 Debtor (Days) 62 86 96 100 91 90 90 90 Inventory (Days) 69 78 73 68 66 69 64 63 Working Capital (Days) 61 90 87 104 106 123 122 122

Leverage Ratio

Current Ratio (x) 1.9 2.0 2.1 2.2 2.5 3.2 3.7 4.0 Debt/Equity (x) 0.3 0.5 0.6 0.5 0.5 0.4 0.3 0.3

29 January 2015 11

Dr Reddy’ s Labs


Cash Flow Statement (INR Million) Y/E March 2010 2011 2012 2013 2014 2015E 2016E 2017E Op. Profit/(Loss) before Tax 14,202 15,660 23,742 24,763 31,699 33,505 38,275 45,397 Interest/Dividends Recd. 614 929 1,669 3,151 1,989 3,159 1,467 1,697 Direct Taxes Paid -985 -1,403 -4,204 -4,900 -5,093 -6,524 -6,240 -7,474 (Inc)/Dec in WC 3,450 -6,501 -4,768 -9,903 -5,265 -11,074 -4,670 -7,383 CF from Operations 17,281 8,685 16,439 13,111 23,330 19,065 28,831 32,236

(inc)/dec in FA -6,134 -12,603 -8,141 -11,297 -14,371 -11,118 -14,417 -15,010 (Pur)/Sale of Investments -3,161 3,531 -10,936 -6,573 -8,253 6,054 0 0 CF from Investments -9,295 -9,072 -19,077 -17,870 -22,624 -5,064 -14,417 -15,010

Change in networth 2,019 -5,740 -780 1,620 -233 300 499 867 (Inc)/Dec in Debt -4,827 8,847 8,707 4,468 8,064 -3,395 0 0 Other Items -1,974 -1,351 -920 -836 -1,640 0 0 0 Dividend Paid -2,216 -2,224 -2,719 -2,736 -3,581 -3,882 -4,381 -5,247 CF from Fin. Activity -6,998 -468 4,288 2,516 2,610 -6,976 -3,882 -4,381

Inc/Dec of Cash 988 -855 1,650 -2,243 3,315 7,025 10,532 12,846 Add: Beginning Balance 5,596 6,584 5,729 7,379 5,136 8,451 15,476 26,008 Closing Balance 6,584 5,729 7,379 5,136 8,451 15,476 26,008 38,854

29 January 2015 12

Dr Reddy’ s Labs

Disclosures This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company(ies) and/sector(s), if any, covered in the report and may be distributed by it and/or its affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for future performance, future returns are not guaranteed and a loss of original capital may occur.

MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors on investments in such business. The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and interpreting information. Our research professionals are paid on the profitability of MOSt which may include earnings from investment banking and other business.

MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest. MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent conflict of interest in some of the stocks mentioned in the research report Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from, any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt’s interpretation of the data, information and/or opinions provided by that third party either publicly or through a subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the document. While we would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents.

Most and it’s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months. Most and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report. Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Motilal Oswal Securities Limited is under the process of seeking registration under SEBI (Research Analyst) Regulations, 2014.

There are no material disciplinary action that been taken by any regulatory authority impacting equity research analysis activities

Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues

Disclosure of Interest Statement DR. REDDY'S LABORATOR Analyst ownership of the stock No Served as an officer, director or employee No

Regional Disclosures (outside India) This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For U.S. Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore, may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited: Anosh Koppikar Kadambari Balachandran Email : [email protected] Email : [email protected] Contact : (+65)68189232 Contact : (+65) 68189233 / 65249115 Office Address : 21 (Suite 31),16 Collyer Quay,Singapore 04931

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025 Phone: +91 22 3982 5500 E-mail: [email protected]

january 2015 dr reddy’s labs - business...

Documents